[Policing Wall Street]
In my article, “Goldman’s CMO Liabilities,” which was first published in The Black Star News on February 5, 2008, I stated that Goldman Sachs was liable for tens of billions of dollars for peddling its toxic Collateralized Mortgage Obligations.
Finally, the media has followed my lead and reported that Goldman’s liabilities may be between $20 and $30 billion. Even Fox Business News is speaking of Goldman’s liability. I recently read an article, “Goldman Fraud Charges Bring back Memories,” which appeared in FOXBusiness.com on 4 June 2010.
This article stated that the staff of the Senate Permanent Subcommittee on Investigations has been reading two federal court decisions concerning Goldman Sachs and its sale of Penn Central Commercial Paper to its clients--without informing its clients that Penn Central Commercial Paper was no longer rated prime. This Fox article did not give me credit to The Black Star for my two articles, which exposed the legal basis of Goldman Sachs’ liability for selling toxic Collateralized Mortgage Obligations and Collateralized Debt Obligations, CMOs and CDOs.
In these articles, “Goldman’s CMO Liabilities” and “Casino Goldman Sachs” I discussed two cases, University Hill Funding v Goldman Sachs and Alton Box v Goldman Sachs, which found Goldman liable in the 1970s for selling the Commercial Paper of Penn Central as Prime rated (equivalent to AAA) when Goldman knew that this commercial paper was not Prime and that Goldman did not disclose this fact to the buyers of Penn Central Commercial Paper.
These are the legal cases, which the staff of the Senate Subcommittee on Investigations has been reading. Recently lawsuits have been commenced against Goldman for selling toxic CMOs and CDOs; and this article will discuss one such federal lawsuit, Basic Yield Alpha Fund (Master), Plaintiff v Goldman Sachs Group, et al Defendants, 10 CV 4537, Southern District of the of New York. This lawsuit involves a CDO, which tracks a pool of mortgages, called Timberwolf.
But first we must discuss Section 12(2) of the Securities Act of 1933, which mandates Goldman’s liability. And in this instance I will discuss a third case, which established Goldman’s liability for selling worthless Penn Central Commercial Paper, Franklin Savings Bank of New York, Plaintiff v Gustave Levy et al., United States Court of Appeals for the Second District, 551 F.2d 521, Decided March 9, 1977. Note: Gustave Levy was the senior partner of Goldman Sachs and Goldman Sachs was a defendant in the lawsuit.
The crux of the lawsuit was Section 12(2) of the Securities Act of 1933, which mandates Goldman’s liability.
Section 12(2) of the Securities Act imposes liability upon:
“Any person who (2) offers to sell or sells a security… by means of prospectus or oral communication, which includes an untrue statement or a material fact or omits a material fact…”
Section 12(2) means that the issuer (in this instance Goldman) of a security, such as a CDO or CMO, has a fiduciary duty to perform an extensive examination of the creditworthiness of any security, which it issues; and, the issuer must inform the purchaser of the results of its credit examination. If it does not do so, the issuer is liable for the resulting loss. Furthermore, the issuer is liable for the loss incurred by the purchaser if the issuer has not performed an extensive credit examination of the security.
Now did Goldman omit a material fact or make an untrue statement? In the Franklin Savings case the Court of Appeals stated on page 527: “”If Goldman Sachs failed to exercise reasonable professional care in assembling and evaluating the financial data, particularly in view of the worsening condition of Penn Central, then its representation that the paper was credit worthy and high quality was untrue in fact and misleading no matter how honestly but mistakenly held….it in fact makes the dealer (Goldman) responsible to Franklin if it is unable to shoulder the burden of establishing that it was not reasonable for it to have determined on March 16, 1970 that the quality of the paper it was purveying was less than that represented.”
In the current case, Basic Yield Alpha Fund (Master), or BYAFM, alleged that Goldman Sachs stated in its prospectus for Timberwolf, a CDO, that Greywolf Capital Management had selected the securities involved. BYAFM stated that Goldman neglected to mention that the securities had been selected by Goldman and that Greywolf was merely the manager of Timberwolf. Even more damaging the complaint states: “Goldman’s trading desks had the right to reject any security suggested by Greywolf and Goldman decided to specifically exclude assets that were performing well.”
But there was a peculiarity to Timberwolf. Goldman structured Timberwolf as a credit default swap, so that Goldman was actually betting that Timberwolf would decline in value. By structuring Timberwolf as a credit default swap, Goldman made Timberwolf more attractive to the buyer, BYAFM, because BYAFM did not have to pay the full purchase price at the time of purchase for Timberwolf. BYAFM only had to make further payments if the price of Timberwolf declined.
As I have previously stated in my articles, in December 2006 Goldman senior management decided to reduce its exposure to CDOs and CMOs, which Goldman had in its inventory. And Goldman was actively seeking to go short CDOs and CMOs. Goldman was betting on a market collapse in CDOs and CMOs.
In or about March 2007 Greywolf Capital Management and Goldman circulated a prospectus for Timberwolf. On March 27, 2007 Goldman acquired all of the securities of Timberwolf. As mentioned above in December 2006 Goldman had decided to short the CMO and CDO markets. So Goldman was selling a product, which Goldman was hoping would decline. Goldman marketed Timberwolf as a credit default swap, where Goldman was short the securities in Timberwolf.
On March 8 Daniel Sparks, a Goldman manager, sent an e-mail in which he referred to “a dramatic credit environment downturn” and reiterates that Goldman is “still net short.” So anxious was Goldman to sell Timberwolf that Sparks suggested special incentives to Goldman’s sales team to sell Timberwolf. On April 19, 2007 Sparks sent an e-mail titled, “UPDATE” GS Syndicate Structured Product CDO Axes (INTERNAL) [T-Mail], to Bunty Bohra that read: “Why don’t we go one at a time with some ginormous credits- for example, let’s double the current offering of credits for timberwolf.”
On numerous occasions between April 23 and June 13, 2007 Goldman contacted Basis Capital Fund Management Limited (BCFM), the investment advisor to BYAFM and Goldman concerning the purchase of Timberwolf. On June 12, 2007 BCFM advised Goldman that it would not invest in Timberwolf until it had further information and assurances from Goldman regarding pricing and market conditions. During the June 13th telephone call David Lehman, a managing director of Goldman Sachs and head of CDO trading, and George Maltezos, an Executive Director of Goldman Sachs, stated to Stuart Fowler and Sahil Sachdev of BCFM that “Goldman had been active buying of CDOs like Timberwolf and was expecting price stability going forward and that the price of Timberwolf was good.” This statement was not true.
Goldman had been net short the CDO market since December 2006 and was not purchasing CDOs- but was selling CDOs.
BYAFM purchased the CDO on June 18, 2007. Goldman rated the two tranches or parts of Timberwolf that BYAFM purchased as AAA and AA. The total purchase price was $80,820,000. On June 22, 2007 Tom Montag, a Goldman manager, sent an e-mail to Daniel Sparks that read: “Boy that Timberwolf was one shitty deal.” On September 17, 2007 Matthew Bieber, a Goldman employee, sent an e-mail to Christopher Creed, a Goldman employee an e-mail referring to Timberwolf, which was created on March 27, 2007. The e-mail read: “3-27 – a day that will live in infamy.”
By marketing Timberwolf as a credit default swap, which in reality is insurance, Goldman would be able to receive payments for every decline in price of the security. And who decided if the price had declined? Goldman.
On June 18, 2007 BYAFM paid Goldman $11,250,000 for Timberwolf. Timberwolf immediately declined. Goldman demanded millions in payments for the decline in value of Timberwolf, which decline had been determined by Goldman. And these are the payments demanded by Goldman as Timberwolf collapsed.
July 4, 2007: $5,040,000
July 11, 2007: $5,100,000
July 12, 2007: $8,190,000
July 16, 2007: $12,400.000
July 17, 2007: $5,100,000
Within less than a month of the purchase of the securities, the price of these securities had declined by $35 million. And once again who determined the price of the securities? Goldman Sachs.
The result: BYAFM went into liquidation.
The question to be determined by the Court is whether Goldman Sachs did a thorough investigation of the credit worthiness of the securities, which comprised Timberwolf, so that Goldman could state truthfully that Timberwolf was a AAA and AA security.
I do not believe that Timberwolf was an investment grade security. And Goldman knew that Timberwolf was, in the words of one Goldman employee: “boy that Timberwolf was one shitty deal.”
